While poor people in developing countries are more than willing to pay for basic goods and services, the existing private sector solutions in place so far do not allow them to meet such needs effectively. They often have to pay higher prices for similar goods and services, or settle for inferior quality.

This article is an excerpt from Issue 23 – Social business: a different way of doing business and investing

We believe that development finance institutions have an important role to play in boosting private initiatives as social and profitable businesses. DFID decided to enter the impact investment market to tackle some of the significant challenges it faces (including market fragmentation, information mismatch and limited fund manager ability to measure the social and environmental performance of impact investments). It is in this way that the DFID Impact Programme was created in 2012. As a key part of this Programme, the USD75m DFID Impact fund was established to invest in businesses that generate benefits for the poor while also achieving profitability. This facility, which is managed by CDC, the UK’s development finance institution, uses a ‘fund-of-fund’ approach – CDC selects and partners fund managers. The USD40m DFID Impact Accelerator Facility, also managed by CDC, invests directly in transformative enterprises. In the short term, these funds will use the capital raised to boost co-investor confidence through robust due diligence of investees’ financial returns and development impact, and by offering limited potential subordination to private investors where necessary to catalyse their participation. In the longer term, they aim to raise additional capital by demonstrating the financial viability and positive impact of pro-poor business models.

With a mere three years of operational experience, the funds are already supporting a large number of pro-poor businesses. Importantly, several of these businesses are showing signs of profitability despite still being in early stages of their lifecycle. Here are a few key early lessons we have learnt:

For social businesses to achieve any impact they need to be financially sustainable. This may take longer than for a typical commercial enterprise but both types of businesses ultimately need to achieve this in order to have a long-term impact on livelihoods.

Most businesses need to serve customers across different income levels in order to be sustainable and companies that rely solely on low-income consumers or suppliers often struggle, especially in the early stages. Moreover, most fund proposals that we have received in traditional developmental sectors (e.g., health and education) have deployed business models with a cross-population focus.

We believe grant capital can play a meaningful role in the early-stages in helping certain social businesses to achieve the scale needed to attract investment capital.

Because poverty reduction is an ambitious and very complex goal we need to develop clarity in measuring success. As impact investors, we are very cautious when claiming any impact on poverty reduction. Consequently, we now measure our impacts on the livelihoods2 of the poor, which we would argue is a more realistic aim. We measure outcomes by first looking at what companies measure (e.g., customer satisfaction, product quality, etc.), and then based on existing available research (e.g., impact evaluation of relevant services, data on specific aspects of poverty in local markets) and a programme of “deep dive” studies (still in the design phase).